2) As an investor, you are considering an investment in the bonds of the Soccer Company. The bonds, which pay interest semiannually, will mature in ten years, and have a coupon rate of 6.5% on a face value of $1,000. a) Assume your required return is 8% (market rate) for the bonds in this risk class, what is the highest price you would be willing to pay for the bond? (Use the PV function) b) What is the current yield of these bonds? c) If you bought the bond at the above calculated price and hold the bonds for one year, what total rate of return will you earn (assuming the market rate does not change)? Hint: You need to calculate the bond price one year ahead (note: in one year 9 years are left to maturity) and then compute the total return based on the capital gains/loss yield (in %) and the current yield (in %) from b). d) What is the yield to maturity on these bonds if you purchase them at the price calculated under a)? (Use the RATE function) e) If the bonds can be called in three years with a call premium of 3% of the face value, what is the yield to call on these bonds? (Use the RATE function) f) If the market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not? g) Now assume that the settlement date for your purchase would be 7/30/2019, the maturity date is 7/30/2029, and the first call date is 7/30/2022. Using the PRICE and YIELD functions; recalculate your answers to parts A, D, and E. Note: the answers must be the same as under A, D. and E. h) Create a chart (graph) that shows the relationship of the bond's price to your required return. Use a range of 0% to 15% in calculating the prices. Use the price function!
2) As an investor, you are considering an investment in the bonds of the Soccer Company. The bonds, which pay interest semiannually, will mature in ten years, and have a coupon rate of 6.5% on a face value of $1,000. a) Assume your required return is 8% (market rate) for the bonds in this risk class, what is the highest price you would be willing to pay for the bond? (Use the PV function) b) What is the current yield of these bonds? c) If you bought the bond at the above calculated price and hold the bonds for one year, what total rate of return will you earn (assuming the market rate does not change)? Hint: You need to calculate the bond price one year ahead (note: in one year 9 years are left to maturity) and then compute the total return based on the capital gains/loss yield (in %) and the current yield (in %) from b). d) What is the yield to maturity on these bonds if you purchase them at the price calculated under a)? (Use the RATE function) e) If the bonds can be called in three years with a call premium of 3% of the face value, what is the yield to call on these bonds? (Use the RATE function) f) If the market interest rates remain unchanged, do you think it is likely that the bond will be called in three years? Why or why not? g) Now assume that the settlement date for your purchase would be 7/30/2019, the maturity date is 7/30/2029, and the first call date is 7/30/2022. Using the PRICE and YIELD functions; recalculate your answers to parts A, D, and E. Note: the answers must be the same as under A, D. and E. h) Create a chart (graph) that shows the relationship of the bond's price to your required return. Use a range of 0% to 15% in calculating the prices. Use the price function!
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:2) As an investor, you are considering an investment in the bonds of the Soccer
Company. The bonds, which pay interest semiannually, will mature in ten years, and
have a coupon rate of 6.5% on a face value of $1,000.
a) Assume your required return is 8% (market rate) for the bonds in this risk class,
what is the highest price you would be willing to pay for the bond? (Use the PV
function)
b) What is the current yield of these bonds?
c) If you bought the bond at the above calculated price and hold the bonds for one
year, what total rate of return will you earn (assuming the market rate does not
change)?
Hint: You need to calculate the bond price one year ahead (note: in one year 9
years are left to maturity) and then compute the total return based on the capital
gains/loss yield (in %) and the current yield (in %) from b).
d) What is the yield to maturity on these bonds if you purchase them at the price
calculated under a)? (Use the RATE function)
e) If the bonds can be called in three years with a call premium of 3% of the face
value, what is the yield to call on these bonds? (Use the RATE function)
f) If the market interest rates remain unchanged, do you think it is likely that the
bond will be called in three years? Why or why not?
g) Now assume that the settlement date for your purchase would be 7/30/2019, the
maturity date is 7/30/2029, and the first call date is 7/30/2022. Using the PRICE
and YIELD functions; recalculate your answers to parts A, D, and E. Note: the
answers must be the same as under A, D. and E.
h) Create a chart (graph) that shows the relationship of the bond's price to your
required return. Use a range of 0% to 15% in calculating the prices. Use the price
function!
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